JUST GROUP PLC Annual Report and Accounts 2021
SUSTAINABILITY STRATEGY: TCFD DISCLOSURE FRAMEWORK CONTINUED
local authority loans. The methodologies for these risks are likely to be analogous to those for liquid corporate bonds above and use proxies. However, we expect some of our illiquid assets to exhibit less transitional and physical risk than our liquid bond portfolio where these assets are linked to renewable energy production and energy efficient buildings. The weighted average life of our commercial mortgage portfolio is about five years, and that of our infrastructure debt investments about 12 years. Given the relatively short duration in each case, the impact of the transition to net zero in emissions is expected to be the dominant risk as the commercial mortgage borrowers meet the expected costs of upgrading the energy efficiency of their properties, for example. Physical climate risk is very unlikely to materialise over these short time frames. CLIMATE RISK – LIFETIME MORTGAGE PORTFOLIO Just Group is exposed to property risk on the lifetime mortgages held on our IFRS balance sheet. These lifetime mortgages are secured against residential properties located across the UK. In the event that the sale proceeds from the property are insufficient to repay the accumulated loan balance on the death or entry into long-term care of the customer, Just would suffer a loss due to the no-negative equity guarantee. Our focus has been on using scenario modelling and portfolio review to assess the transition and physical climate risks to each property and measure the potential impacts on property values. Climate scenarios have been used to support analysis of the Group’s exposure over time and considered the following property related risks: coastal erosion, flooding, subsidence and the setting of minimum EPC ratings for residential properties. Following the standard metric for considering climate change by the global greenhouse gas concentration as measured by the Representative Concentration Pathway (“RCP”) levels, the scenarios modelled were at four levels as shown in the table below:
Our assessment is that physical risks will have a very small impact on the overall value of properties in the portfolio, up to a 0.2% reduction in total property values by 2080. This projection is based on RCP8.5, the most severe scenario considered as it assumes that no action is taken to reduce emissions. Of the physical risks to which we are exposed, we expect climate change to have the most material impact on the flood risk. Analysis suggests that our exposure to properties classed as having a high flood risk could increase steadily from 0.3% now to 1.5% by 2080 of properties backing our lifetime mortgages. Under the RCP8.5 scenario, this could mean an additional 200 properties exposed to high flood risk by 2080 out of a portfolio of 62,000 properties. The projections suggest that a similar pattern of increasing risk of subsidence over time due to climate change increasing the chances of lengthy periods of drought. Under the most severe scenario considered, about 100 more properties could be exposed to subsidence by 2080. Analysis indicates that our exposure to properties where coastal erosion is likely would remain insignificant over the period to 2080. TRANSITION RISKS TO PROPERTY DUE TO CLIMATE CHANGE Our analysis suggests that transition risk from the move to a low carbon economy could be a more significant exposure in the medium term than physical climate risk. A fast transition via government policy change, particularly in home energy efficiency requirements, is likely to have the most material impact on Just. This impact will be mitigated by the extent to which government softens the blow for homeowners through grants and subsidies. The government’s stated aim is for as many homes as possible to be upgraded to an EPC rating of C by 2035 and it will consult on how this could be achieved. Other policy initiatives are expected with lenders being expected to play their part in encouraging improved energy performance among the properties on which they advance loans. An estimated three-quarters of the residential properties underlying our lifetime mortgage portfolio of our existing lifetime mortgages have an energy rating below the government’s target of an EPC rating of C. The lower the EPC rating, the more likely that the property’s value will be affected by this transition risk. Our projections suggest that a scenario in which properties were required to transition to better energy efficiency could lead to a 2% reduction in property values in total across our portfolio. The projection is based on assumptions about the cost of improving the energy ratings to a minimum level of C, before allowing for any financial support from government that may become available. This reduction in value would only affect Just in instances where it leads to the property sale price being lower than the loan balance. Any impact would be incremental over a period of years as and when repayable following the customer’s death or entry into long-term care. CLIMATE RISK MANAGEMENT FOR THE PROPERTY PORTFOLIO All the metrics produced by our scenario analysis are purely illustrative as they project forward the potential climate impacts on our existing property portfolio over the period to 2080. The composition of the property portfolio will change significantly over the years and so the outturn in practice can be expected to be quite different. The metrics are also likely to overestimate the extent of the impacts as no allowance is made for any mitigations, such as future action by the government to improve flood defences. Our property underwriting assessments already allow for flood and coastal erosion risk. The climate change scenario analysis is being used to improve understanding of how our lending policy and underwriting approach need to evolve to manage any exposure to climate change risk. Key risk indicators for transition risk, such as EPC limits, are being developed and will be tracked. Changes to data collection processes will be used to allow quantification of a wider range of scenarios and reduce the need for assumptions.
Emissions scenario illustration
Increase in temperature by 2100
RCP2.6 Significant global reduction
1.4 – 3.2°C
RCP4.5 All countries implement Paris Accord
2.1 – 4.2°C
RCP6.0 All signatories implement Paris Accord
2.5 – 4.7°C
RCP8.5 Business continues unchanged
3.4 – 6.2°C
PHYSICAL RISKS TO PROPERTY DUE TO CLIMATE CHANGE This analysis has enabled us to understand how our exposure to physical risks due to climate change could change over time, assuming no slowing down or mitigation of climate impacts, such as through government action.
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